Speculative dynamics

Dan Bernhardt; P. Seiler; B. Taub

doi:10.1007/s00199-009-0456-y

Speculative dynamics

Dan Bernhardt, P. Seiler, B. Taub

Aerospace Engineering and Mechanics

Research output: Contribution to journal › Article › peer-review

12 Scopus citations

Abstract

We develop a method for solving for equilibrium outcomes in stationary strategic settings in which speculators are informationally large and understand how their actions affect the information content of prices. This allows us to characterize speculation by institutional investors who receive private long-lived information on a recurring basis, and trade strategically. When the underlying asset value process has a stationary autoregressive structure, we develop a contraction mapping argument to solve for the stationary linear equilibrium. We derive analytically and numerically how the characteristics of private information-its quantity, persistence and correlation, and division among speculators-affect trading profits, pricing and trading strategies. Our central finding is that what matters for equilibrium outcomes are the most recent signals that speculators receive. Speculators trade so much more aggressively on new information than old that the bulk of their profits come from their two or three most recent private signals. Trading on past prices drops off faster yet; effectively only the most recent price matters.

Original language	English (US)
Pages (from-to)	1-52
Number of pages	52
Journal	Economic Theory
Volume	44
Issue number	1
DOIs	https://doi.org/10.1007/s00199-009-0456-y
State	Published - Jul 2010

Bibliographical note

Funding Information:
An earlier draft was titled, “Cladistic Asset Pricing”. We thank Roger Germundsson, Ken Kasa, Lars Hansen, Burton Hollifield, Conrad Wolfram, and especially conference discussants, Kerry Back and Pete Kyle, for helpful comments and suggestions. We also thank seminar participants at the University of Chicago, the University of Illinois, the University of Rochester, University College London, the Western Finance Association meetings, the Utah Winter Finance meetings, the Society for Economic Dynamics and the Bachelier Society. We gratefully acknowledge financial support from NSF grant # SES-0317700.

Keywords

Forecasting-the-forecasts
Frequency domain
Market microstructure finance
Speculation
Stationary linear equilibrium

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This output contributes to the following UN Sustainable Development Goals (SDGs)

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abstract = "We develop a method for solving for equilibrium outcomes in stationary strategic settings in which speculators are informationally large and understand how their actions affect the information content of prices. This allows us to characterize speculation by institutional investors who receive private long-lived information on a recurring basis, and trade strategically. When the underlying asset value process has a stationary autoregressive structure, we develop a contraction mapping argument to solve for the stationary linear equilibrium. We derive analytically and numerically how the characteristics of private information-its quantity, persistence and correlation, and division among speculators-affect trading profits, pricing and trading strategies. Our central finding is that what matters for equilibrium outcomes are the most recent signals that speculators receive. Speculators trade so much more aggressively on new information than old that the bulk of their profits come from their two or three most recent private signals. Trading on past prices drops off faster yet; effectively only the most recent price matters.",

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author = "Dan Bernhardt and P. Seiler and B. Taub",

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Speculative dynamics

Abstract

Bibliographical note

Keywords

UN SDGs

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